Platinum Problems

With all the serious unknowns, minting a $1 trillion platinum coin seems an act of hubris.

At the risk of understating the obvious, the fact that we are having a discussion bordering on the serious over running the printing presses to pay our bills — i.e., minting a platinum coin of large dollar value — is troubling. And yet we are. Paul Krugman is enthusiastic in Friday’s New York Times: “Mint that coin!” White House press secretary Jay Carney was even asked about minting a coin as a way to avoid negotiating a debt ceiling increase with Congress. Carney didn’t rule out the possibility.

Donald Marron, head of the Urban-Brookings Tax Policy Center, seems to agree with the argument made by Bloomberg’s Josh Barro and others: in the event that Congress and the president can’t come to an agreement on raising the debt ceiling, the United States has limited options, all bad. “In this ugly group,” writes Marron, “the platinum coin looks relatively shiny.”

What are the options for the president in the event that a deal can’t be reached with Congress?

The government could default — but that would be doomsday. The government could prioritize interest payments to avoid default, use the revenue that will be available, and partially shut down the government, but that would mean a lot of folks who are expecting checks wouldn’t get them. And there are practical problems — many unappreciated — with carrying out this solution. The government could issue IOUs to be repaid in the future. But how would the markets react to this? And is it legal? The president could invoke the Fourteenth Amendment and continue to issue debt, but the political fallout from this action would be massive and the White House has basically ruled it out. The government could sell assets like land, buildings, and gold to pay the bills — but this would be quite an undertaking which would be hard to execute quickly.

Taking partial control of the money supply away from the Federal Reserve and giving it to the Treasury could be disastrous.

And then, of course, there is the coin solution. An obscure law allows the secretary of the Treasury to mint and issue platinum coins of any denomination. The intent of the law is to allow the Treasury to issue coins to commemorate special occasions — not to pay the bills. (Though it must be admitted that a platinum coin minted because Congress and the president couldn’t come to an agreement to raise the debt ceiling would be an episode worthy of some sort of commemoration.)

Against that backdrop, the coin solution certainly looks more reasonable than it does in isolation. Although some disagree, the majority opinion among legal scholars (I am not one) seems to be that the Treasury has the legal authority to mint a trillion-dollar platinum coin (or a coin worth one hundred times that amount). And the government could implement the coin solution quickly and efficiently.

So why not do it? The most compelling argument against the coin, in my mind, was opening the Pandora’s box of running a printing press. Economies have been devastated by this action. Taking partial control of the money supply away from the Federal Reserve and giving it to the Treasury could be disastrous.

I agree with Marron that the Fed could handle the inflationary effects of a trillion-dollar coin. “As long as the Fed does its job,” he writes, “inflation would not be a risk.” But who’s to say that the coin solution will only be implemented once? If the president — not necessarily only President Obama, but future presidents as well — continued to use the coin solution, then at some point the Fed would be overwhelmed and the United States would experience devastating inflation.

That’s enough to convince anyone that the coin solution shouldn’t be used, right? Well, Barro defeats this argument by countering that the resolution of the current debt ceiling debate could include changing the law to cap the dollar value of platinum coins.

But if the letter of the inflation argument is defeated, the conclusion that the coin solution is implausible is reinforced.

Printing money is the refuge of banana republics. What would the world reaction be to the United States running the printing press?

Why? Consider this tautology: either the White House issues a platinum coin in a denomination small enough such that the Fed could keep a lid on inflation, or it issues a platinum coin with a high enough dollar value that inflation takes hold. If the former, then we’re in exactly the same situation as we are now at some point in the future — all we’ve done is kick the can down the road; we’ll be arguing about the debt ceiling again in, say, six months. If the latter, then all the horrible macroeconomic effects that are associated with the Treasury printing money come to pass.

In other words, unless the president is willing to inflict serious economic damage on the country, then all the coin solution buys us is time. And time buys nothing of substance here.

Furthermore, it’s not clear to me that a partial shutdown which prioritizes spending is worse than the coin solution. Printing money is the refuge of banana republics. What would the world reaction be to the United States running the printing press? I don’t know, and no one does. What would the market’s reaction be? What would the bond ratings agencies’ reactions be? What would the political fallout be, and what effect would that fallout have on the economy? The coin solution seems simple in theory, but, if implemented, the law of unintended consequences could easily govern the day.

With all these serious unknowns, the coin solution seems an act of hubris.

But perhaps we’re overthinking this. Henry Olsen, my colleague at the American Enterprise Institute, is wise. I told him that the most persuasive arguments against the coin solution may be that it is an obviously silly idea and would be a juvenile tactic. But is that a sufficient argument against the coin solution? “Sometimes,” replied Mr. Olsen, “that’s all you need to say.”